Search results

The VIX is a well-thought-out, robust calculation that charts volatility for you. It is a weighted average of all options with a bid greater than zero. The CBOE keeps volatility indexes on a few other things as well. Other than that - as the saying goes - if you want it done right you'll have...

I agree that for most people in most situations, this is an academic argument. The differences will probably be too small to matter. But if you happen to be in a situation where it DOES matter, then you really, truly, absolutely need to use your own subjective interest rate. Let me give...

2.9% sounds way too high. .25% makes more sense. Why use a ten-year rate for options that expire in a month or two?

No problem. Please believe me when I say that behind the scary-looking math, all this options stuff is just common sense. Honest.

Yes I think you're right on that. Thanks for catching it. I see that the current price for the 13-week T-bill contract is 99.86. By your calculations that would imply an annual risk-free rate of .56%, which I think is about right.

Sync, if you're talking about options on stock, the risk-free interest rate is used both to calculate the forward price of the stock, and also the cost of carry of the option itself. In both cases, the answer depends on YOUR rate of interest. As for the forward price, look at it this way. If...

The correct interest rate to use is YOUR interest rate. If you're a net buyer of options, what would you have made risk-free with the money you used? If you're a net seller of options, how much are you earning on the funds you received? Those are the correct rates for you to use. It's...

I think you missed my point Mizhael. Which was that there is no such thing as an objective risk/reward comparison of day trading vs swing trading vs long-term position trading. This is a SUBJECTIVE comparison and you are the subject. You have to learn what you feel comfortable with. Your...

Every successful trader I've ever known has a very, very idiosyncratic trading style they've arrived at through trial and error. They know that style inside out, can't make money trading any other style - and nobody else can make money trading their style. So at some point Mizhael - on your...

The wider the bid/ask spread, the better it is for market makers and the worse it is for retail traders. The tighter the bid/ask spread, the worse for market makers and the better for retail traders. So you definitely want to trader options that are liquid and have a tight bid/ask spread.

That may be so. But I've had many dealings with professors of finance who are brilliant mathematicians, and what stands out is how absolutely, incomprehensibly clueless most are about how the math is used in the real world. It's a mistake to think that brilliance in math correlates to an...

Very interesting. It's not often here that I find tasty food for thought, so I appreciate it.

What would be an example of a "premium/strike price ratio?"

If you read in Barron's that a poll of the nation's investment advisors showed 95% are bullish on IBM, would that inspire you to buy IBM? Of course not. Any seasoned trader understands that such unanimity of opinion is a contrarian indicator. I look at IV and skews in the same way. Sure...

Right, lognormal prices. That's what I meant. The skew in stock market index options doesn't change much, but the skew in other options - such as options on crude - does change a lot. Sometimes the OTM calls trade way higher than the ATMs while the OTM puts trade at the same IV as the ATMs...

Sorry for being so unclear. My question was meant neither as a real question nor a quiz question but rather as a rhetorical question. Its purpose was to illustrate some of the problems with the common belief that IV is the market's expectation of future volatility. You probably know that...

This seems like a nice theory but again, it doesn't hold up to even a cursory analysis. At this moment, SPY is about 83. The 82 puts have an IV of 48%. The 95 calls have an IV of 31%. Does it take more volatility to move 1 point to 82 than 12 points to 95? Take a look at that skew and...

Looking at the SPY options, I see that the 95 strike is trading at 31% IV, while the 60 strike is trading at 70% IV. So if IV is the market's predicted volatility of SPY, then what does the market believe? That SPY's actual volatility will be 31%, or that it will be 70%?

Never heard of it.

All the options on IBM are related - some closely, some distantly. Let's start with the two most closely-related options - a put and a call at the same strike. In our previous example, as the IBM 100 calls are being bid up, the 100 puts will be bid up almost the exact same amount because of...